Capital Debt

Operations and General Administration

Authorization: Board of Governors
Approval Date: Mar 1, 2011

Purpose

The purpose of this policy is to provide a framework for the uses and approval process for capital debt and establish the financial measures that will be used to monitor the impact of debt on university finances. The intent of this policy is to manage the overall cost of capital, minimize long-term costs for debt service and ensure the overall level of risk does not exceed acceptable levels.

Scope of this policy

This policy applies to all colleges, administrative units and associated companies of the University whose accounts are included in the University consolidated financial statements.  Associated companies shall not incur unsecured debt without first obtaining approval from the Board of Governors of the University. 

The University may only use external debt financing to meet the funding requirement of a long-term capital project that has been approved by the Board of Governors. Individual faculties or administrative units are not legal entities and are not permitted to borrow funds.

This policy is not intended to apply to loans of less than $1,000,000 and does not apply to financing for the on-going cost of operations or to projects financed through the Internal Loan Policy. 

This policy will be reviewed annually to ensure consistency with the University’s objectives and external environment.

Policy

Prudent utilization of debt provides a source of financing for long-term capital investments necessary to achieve the University’s mission and strategic objectives.  University management will evaluate all financing sources for capital projects including internally restricted or unrestricted resources, donations, grants, internal loans and external capital debt.

Capital debt is restricted to approved capital projects that will produce verifiable incremental revenues or cost savings and have a feasible repayment plan.  The capital debt must conform to the authority granted under the University of Saskatchewan Act, 1995.

Long-term obligations will not be used for operating purposes, and the life of the obligations will not exceed the useful life of the projects financed.

Debt Capacity: 

It is the objective of the University to ensure the level of debt is financially sustainable by monitoring debt capacity.  The University will use key policy ratios as guidelines to determine and monitor the maximum amount of external debt incurred or guaranteed by the University.  Policy ratios, as outlined in the Guidelines include:

1)     Debt affordability which is measured by:

a)     The ratio of total capital debt as a percentage of total revenue.  Total debt shall remain less than 20% of total revenue.

b)     The ratio of total capital debt as a percentage of revenue available for repayment. Total debt shall remain less than 33% of revenue available for repayment.

2)     Debt Service coverage which is the ratio of principal and interest as a percentage of general revenue.  The ratio of cash available for interest and principal payments shall be less than 3%.

3)     Resource allocation which is a measure of the resources allocated to debt and is measured by the total debt per full-time equivalent student.  The university will monitor total capital debt compared to a threshold of $12,000 in debt per full-time equivalent student.

Debt Management: 

The type of debt should be designed to ensure the lowest cost of capital consistent with the University’s risk tolerance profile. 

The University will seek to limit risk within the University debt portfolio by balancing the goal of attaining the lowest cost of capital with the goal of managing interest rate risk. Variable rate debt can provide a lower cost of capital by accepting interest rate risk.  To limit this risk, administration will manage the percentage of variable rate debt.  Variable rate exposure may be achieved directly through debt issuance or indirectly by entering into an interest rate swap agreement.

The University will manage outstanding debt over time to achieve a low cost of capital and to take advantage of interest rate cycles and refunding opportunities. 

Procedure summary

1.  External debt is only considered after a capital project is approved and an analysis of the impact on financial ratios has been completed and documented.

2. To minimize counterparty credit risk, the minimum standard for counterparty companies is ‘A’ or equivalent as rated by a recognized credit rating agency.  Credit ratings will be monitored annually by Student Accounts and Treasury.

3. In developing financing recommendations, the Board shall consider:

a.The time proceeds of obligation expected to remain on hand and the related carrying cost.

b.The options for interim financing, including short-term and internal borrowing.

c.Trends in interest rates and other factors as appropriate

4. Documentation and confirmation requirements will be completed by the designated signing authority.  All financing agreements must be signed by two authorized signing officers in accordance with the university Signing Authority Policy.

5. An annual report summarizing the composition of current debt and compliance with debt capacity ratios will be provided to the Board of Governors as part of the year end reporting schedule.  In addition, the administration shall include the amount of debt that is planned to be accessed annually for future capital project and the impact on key ratios.

Related Documents

There are no other documents associated with this policy.

Contact Information

Contact Person: Director, Student Accounts and Treasury
Phone: 306-966-4604
Website: http://www.usask.ca/fsd/